urban and goverance

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2/28DeveloPIng SuStaInable anD InCluSIve urban InfraStruCture ServICeS: a guIDebook for ProjeCt ImPlementerS anD PolICy makerS In InDIa2


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1.1

Chapter 1

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This chapter describes the Indian context or inrastructure

development that includes urbanization and sustained economic

growth, driven by cities. Quality urban inrastructure that meets

economic demand and serves the basic needs o citizens will be a key

policy objective over the long term. The context is equally defned by a

several-decade-long decentralization process aimed at strengthening

local government capacity to manage services. Functional

decentralization has to be matched with better and more accountable

local governance. Good governance and appropriate government

structures, as defned by the Model Municipal Law (MML) (2003),

provide a oundation or every technical aspect o inrastructure

development, as presented throughout this guidebook.

Articles ound in this chapter: Urbanization and Economic Growth Governance and the Progress of Reforms The Model Municipal Law

Fire(d)program



1.1

ARTICLE 1.1

uizi d ecic gw

uizioWhile cities in India are illed with vibrant activity and energy, they are also chaotic, complicated,

and too often congested. There is immense wealth and opportunity, side-by-side with immense

poverty and deprivation. And the scale is enormous: Indias urban population is larger than the entire

United States, and is second only to Chinas. It is clear that Indias urban population will continue

to grow, probably doubling in the next couple of decades. To meet the challenges of this inevitable

urbanization, India needs well-performing cities. This guidebookexamines urban performance

from the perspective of improving governance and infrastructure development. Most people now

recognize that helping cities function better is central to Indias future; global trends from the World

Banks 2009 World Development Report (WDR) support this realization.

1. No country has grown to middle-income status without urbanizing and industrializing. Countries

become at least 50% urbanized before reaching middle-income status, and all high-income

countries are 70%80% urbanized.

2. The place (as in connectivity to other people and markets) where people live is the most

important correlate of a persons welfare. This includes both economic-related connectivity and

quality of life. There is a strong connection between urban liveability in terms of security,congestion, opportunity choices, etc. and a countrys gross domestic product (GDP)

per capita.1

3. The economic density found in cities improves productivity, which is the key to modern

economic growth.

In India, the urban transition is taking place. The pattern is similar to what Europe and the United

States experienced in the late 19th century, Latin America experienced in the 1970s, and East Asia

experienced more recently. From the economic growth

and income perspectives, that is a good trend, as the

above points suggest. Approximately 60% of GDP is

derived from the Indian urban economy now, while

less than 30% of the population lives in cities. The

urban contribution will likely rise to 70% of GDP overthe next couple of decades (see Figure 1-1).

Without a doubt, the urban population will continue to

grow, close to doubling in the next couple of decades.

The Registrar General of the census has projected the

urban population will reach 534 million in 2026 (38%

of Indias total), up from 286 million in 2001 (28%)

during the last census. It is interesting to know that

67% of the total population growth in India during the

next 25 years is expected to take place in urban areas.

1 Gill, I. and Kharas, H., 2007, An East ARenaissance: Ideas for Economic GrowWorld Bank.

Urban population

growth (% of total)

RuralGDP

share

Urban

GDP

share0%

20%

40%

60%

80%

100%

1990 2008 2030

Urban Contribution to GDP will grow to 70% of total

Urban Population will grow to 40% of total



t 1-1. Pcd u d t Ppi i Idi

2001 2011 2021 2026

Total Population (million) 1,028.61 1,192.50 1,339.74 1,399.83

Urban Population (million) 286.12 357.94 432.61 534.80

% Urban 27.82 30.02 32.29 38.21

Total AEGR (%)* 1.48 1.32 1.23 1.16

Urban AEGR* 2.24 2.07 2.50 1.89

* Annual Exponential Growth RateSource: Population Projections for India, 200126, Registrar General of India, 2006.

At the same time, rural-urban disparities have increased. Some 60% of Indias poor now live in the

lagging central states, with low urbanization (see Figure 1-2). Because of their immense agricultural

wealth, the irst great Indian civilizations located in these regions. Over time, they have prospered,

currently supporting 400 million inhabitants and feeding many more throughout the country. Yet

these areas lag in almost every development indicator, including economic growth over several

decades (see Figure 1-3). The fact is that economic growth has shifted from the rural areas to cities,

and, unfortunately, policies that attempt to reverse this (such as subsidized inance to businesses for

opening facilities) tend to have little long-term impact.2 Instead, economic opportunities have shiftedto cities.

fi 1-2. Pvy rs a his i C Idi

2 This should not be confused withincreasing access to services forall, whether rural or urban. Forexample, the massive expansionof state-bank branches into allcorners of the country by IndiraGandhi after 1969 contributedto a sharp rise in savings andinvestment rates. See Basu,Kaushik and Maertens, Annemie,

2007, The Pattern and Causes ofEconomic Growth in India, OxfordReview of Economic Policy.

Source: World Development Report, 2009.

6.4-9.7

9.8-16.7

16.8-24.8

24.9-35.4

35.5-46.6

No data

Year



1.1

Source: McKinsey Global Institute, 2010.

u ecooicsModern economic growth is not exactly synonymous with industrialization, because the economy

also includes service sectors and other innovative areas that result from technological advances,

new ideas, and investment. India is certainly transforming, with high-level industry, manufacturing,

and information technology (IT) services having greater importance (see Figure 1-4). From the end

of 1990s to 2006, the IT sector increased from 1.2% of GDP to 4.8%. During the irst decade of the

21st century, Indias economy experienced real growth of 8% on average, with inancial services,

transport, communication, and construction experiencing double-digit growth. These sectors tend

to agglomerate in cities, where the operating conditions, including proximity to larger markets, deep

supply chains, and diverse intermediaries like inancial institutions, are conducive to growth.

fi 1-4. Cpsii Idis ecy

fi 1-3. fss-gwi Ss a m u

Source: Indicus Analytics.

Tertiary (transport,

communication, trades,

tourism, banking, IT,

public administration)

Secondary

(construction,

manufacturing, utilities)

Primary (agriculture,

mining, fishing,

forestry)

GDP(constantprices,

millions,

Rs.) 35,000,000

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

2001-02

56%

51%24%

23%

26% 20%

2007-08

12.0

0 10 20 30 40 50 60 70 80 90 100

10.0

8.0

6.0

4.0

2.0

0.0

GDP growth rate (%), 1990-2008



Although competition between irms helps drive eficiency in capitalist societies, it is the economic

infrastructure that allows the urban economy to thrive. The economic infrastructure connects

people to markets through telecommunications, ports, rail, airports, and roads. Infrastructure

systems also allow large populations to live in close proximity; without water supply and sanitation

systems, electrical grids, hospitals, and schools, cities would not be safe places to live or oer the

opportunities that they do.

Apart from physical infrastructure, economic growth is strongly inluenced by enabling conditions

that include business regulations, such as contract enforcement, taxes and fees, legal procedures,

and general ease of doing business. Most economists agree that India needs to improve its enablingconditions for business. India ranked 122 in a list of 181 countries surveyed by the World Bank in

2009 (see Annex 1-1). Eficient enabling conditions decrease transaction costs. Both physical and

nonphysical aspects allow people to exchange ideas, as well as goods and services, with one another,

and allow them to specialize in enterprises that provide the best opportunities available. Productive

economic interaction between people is the key to development, and it occurs more readily in cities,

which by deinition are dense.

A country pursuing modern economic growth is implicitly pursuing greater urbanization. It does

not matter whether explicit policies in the past tried to stymie rural-urban migration by restricting

access to urban land or by funneling investment to rural areas. If opportunities exist in cities,

the urban pull is strong. The resulting economic beneits to the country are equally evident. Two

important spillovers are increased investment and improved living standards. This is why 70%

of new jobs will be generated by cities and the number of middle-class households in cities will

quadruple in the next two decades.3

The spillover into rural areas is an important characteristic of Indian growth. The rural population

will remain large in India, and rather than simply migrating to existing metropolitan areas, the

growth of small- and medium-sized cities signiicantly contributes to the urbanization trends: By

2030, 1,000 villages will urbanize, and 26 small cities will grow to more than 1 million people.4

Connecting rural areas to cities, through better transportation and education networks, will allow

the urban growth phenomenon to beneit a larger group of people, dominated by the rural poor.

The State of Tamil Nadu oers a good example of how quality roads and connective infrastructure

expanded job opportunities to rural areas that otherwise were not well endowed with natural

resources. The major challenge is whether India can successfully manage this growth; the new urban

areas have minimal infrastructure, management expertise, or inancial resources.

If urbanization is such a major trend in development, how does a country encourage the

phenomenon in a way that is beneicial to all people, over the long term? Can the urban economic

driver, with increased investment and improved living standards, become a sustainable cycle? Or

does increased population inevitably mean more congestion and urban squalor?

How limited public resources get utilized is a key part of governments policy-making process. Often

a tension exists between urban and rural investment. With infrastructure development, tensions

also exist between expanding networks outward from a citys core and upgrading current systems

and improving quality within the city. Budget allocations for infrastructure, or for any of a number

of other issues, can be become contentious because vested interests permeate government systems.

Transparent and accountable governance helps ensure local oficials spend resources more wisely

in ways that beneit the widest range of people. Community participation and market orientationof services at the local level eectively prioritize investment needs. And a system where planning

is linked directly to implementation, as well as to operations and maintenance, provides more

sustainable services. At this point, however, it is questionable how well local governments in India

can manage their urban spaces. The proliferation of slumsareas underserved with municipal

infrastructure and services, including water, sanitation, housing, education, and healthcare

increased from approximately 17% of the urban population in 1981, to 22% in 2001, to 30% in 2010.

This is a good indication that city oficials are having dificulty managing the complexity and speed

of urbanization.

3 McKinsey Global Institute,2010, Indias urban awakening:Building inclusive cities, sustainingeconomic growth, http://www.mckinsey.com/mgi/publications/india_urbanization/index.asp.

4 Ibid, page 45.



1.1The Jawaharlal Nehru National Urban Renewal Mission

(JNNURM) represents a realization that urban reforms are

necessary, if not mainstream. The 11th 5-year plan elevated

urban awareness by signiicantly increasing budget allocations

for urban infrastructure, thereby allowing JNNURM to take shape.

The program aims to improve urban management. But for this

to happen, much more deepening and institutionalization of

reforms clearly has to occur (see Chapter 7).

Now is a good time to address the weaknesses of localgovernment, since the increasing urban population and economic

prospects of Indian cities are such major, driving forces of the

country. Improved business access to global markets, as well as

rapid advances in technology, are fueling the economic engine.

For now, it is very possible that economic growth is happening

in spite of a lack of good management and governance in Indian

cities. During 200102, the Financial Institutions Reform and

Expansion ProgramDebt & Infrastructure, known as the

FIRE (D) Program, conducted a capacity needs assessment of

local government and found tremendous deiciencies in inancial

management, resource mobilization, and project development,

among other things. Based on this assessment, several donors incorporated institutional

strengthening into their work and prepared training manuals to help improve

urban performance.5

As the urban population surges, there is concern that any one of the many challengesaordable

housing supply, congested roads, limited water, and sanitation serviceswill amplify and undermine

Indias economic growth. Under current investment levels, infrastructure services will deteriorate,

which could seriously threaten the urban living environment. Perhaps India is at a critical moment

where it can preserve and build on the gains from the irst major wave of economic reforms that

occurred in the late 1980s.

Isc d gowhDuring the last two decades, research into economic growth has shifted from broad, macro-

level factors (like national savings and investment rates) to more nuanced, sector-speciic study.

Since the 1980s, with wider data sets and greater computing capacity, economists have been

eager to understand what sectors (e.g., education, health, and infrastructure) aected economic

productivity the most. What economists call endogenous growth theory examines the dynamism of

productivity and technology across sectors. The theory provides strong economic justiications for

policy measures toward R&D, education, and healthcare. This guidebook is most interested in how

infrastructure broadly, and water and sanitation more speciically, aect economic growth.

Researchers have tried to examine the impact of safe water, sanitation, and hygiene (or lack thereof)

on economic growth indicators. The reasons why economists are interested in the water and sanitation

sectors are obvious: In 2007, the World Health Organization (WHO) found that more than 10% of

worldwide deaths are due to just two environmental risk factors, namely, (1) unsafe drinking water

and poor sanitation practices, and (2) indoor air pollution from cooking. Children are the largestgroup of victims, with 74% of child deaths due to these two issues (more than 2 million children die of

diarrhea each year).6 Unsafe water and sanitation adversely aect the economy in the following ways. Some 443 million school-days are lost each year globally due to water-related illnesses. At any given time, 50% of all people in developing countries suer health problems due to poor

quality water and sanitation, causing people in low-income countries to lose about 20 more

years of healthy life as compared to high-income countries. Water-related aflictions reduce GDP in sub-Saharan Africa by approximately 5% annually

a igure far exceeding total aid lowing into this region.7

5 The USAID FIRE (D) Program, theWorld Bank, and the Water andSanitation Program (WSP) prepareseveral manuals for inclusion inthe regional Indian AdministrativeService Institute. Similar needsassessments were carried out prioto launching JNNURM in 2005.

6 WHO, 2007, http://www.who.int/mediacentre/news/releases/200pr30/en/index.html.

7 Finance & Development,December 2006, InternationalMonetary Fund.



It is clear that good infrastructure provides basic services and improves quality of life. For instance,

the link between water-borne diseases and environmental infrastructure is direct. Infrastructure is

also supposed to stimulate economic growth by allowing businesses to operate more eficiently, and

for workers to be healthier and more educated. The McKinsey Global Institute suggests that, with

better infrastructure, Indias economic growth rate could improve by 1.0%1.5% for a sustained

period. This is a signiicant increase that would accelerate progress around the country. Many

economists have looked at how large infrastructure systems positively aect economic growth,

but the statistical results paint a more complicated story than policy makers would like. For

policy makers, infrastructure development makes a big statement. But since it is expensive, there

are tradeos in spending public resources on new roads, electrical grids, or water pipes versusother areas, like education and health. Although several studies8 have made strong links between

infrastructure and long-term growth, inconsistent results occur across countries and between

dierent types of infrastructure. For example, in Thailand, major road construction had a big impact

on productivity growth from 1975 to 1995, whereas, in Indonesia, roads did not show signiicant

impact, but telephones and electricity expansion did.9

Infrastructure development, per se, may not lead to optimal growth, because of competing demands

on limited resources (investment tradeo) and because quality of infrastructure varies. The key

challenge is making good investment decisions to serve the needs/demands of the population,

minimize resource wastage, and eliminate bottlenecks in the economy. The more stylized argument

emerging is that infrastructure most signiicantly contributes to economic growth when it is

combined with other necessary elements, such as good management, an expanding business sector,

poverty alleviation, and inancial surpluses available for investment. The following reveals a more

nuanced story of infrastructure development.10

Countries do not invest in infrastructure before it is needed and aordable. The productivity

gains from infrastructure may not be worth the cost for poor countries. Actually, rich countries,

not developing countries, tend to invest more in infrastructure (e.g., the UK spends more than 20

times more per capita on infrastructure each year than India does). The quality of infrastructure is more important than the amount (e.g., paved roads have a bigger

impact than the total length of the road networks). Infrastructure has to be utilized properly to ensure productivity, and therefore should respond to

market-oriented demand. Investment in infrastructure should focus on removing constraints to other economic drivers,

such as allowing business transactions to take place more eficiently.

The enabling conditions (e.g., ease of use, quality regulations, safeguards, and good operationsand management) determine whether infrastructure is utilized eficiently and productively.

From a practitioners point of view, these critiques make intuitive sense. The FIRE (D) Program

quickly realized that good governance and management had a huge impact on the utility of an

infrastructure project. The infrastructure aspirations of India will surely require stronger inancial

and regulatory support from local government up through the center. Sustainable and large-scale

advances in urban infrastructure cannot take place without improvements in the revenue base, or

without competent urban management. Otherwise, projects will remain small in scope, ill conceived,

poorly executed, and unprofessionally operated and maintained. The fact that infrastructure

development does not automatically lead to more prosperous development should present some

caution, lest the move to invest heavily in infrastructure be wasteful. For practitioners, this caution

means that infrastructure planning (see Chapter 3) and project development (see Chapter 5) need

to be pursued properly. Funding allocations and decision making should be more transparent,results oriented, and tied to the democratic process. This helps ensure better accountability over

funding decisions. In a transparent and accountable system, a poor decision would at least be vetted

appropriately by the wider community.

8 See Easterly, W. and Servn, L.,1993, The Limits of Stabilization,Infrastructure, Public Deicits andGrowth in Latin America, 1980-

2000, Princeton, NJ, PrincetonUniversity Press; and Caldern, C.and Servn, L., 2004, The Eectsof Infrastructure Development onGrowth and Income Distribution,Central Bank of Chile, WorkingPaper 270.

9 See Straub, S., 2007,Infrastructure and Development:A Critical Appraisal of the MacroLevel Literature, mimeo,

World Bank.10 Straub, S., Vellutini, C., andWarlters, M., 2008, Infrastructureand Economic Growth in EastAsia, World Bank, Policy ResearchWorking Paper.



1.1ARTICLE 1.2

gvc d Pss rs

IodcioIn 2005, urban development and infrastructure investment became a signiicant part of the

Government of Indias agenda. The Prime Ministers Independence Day speech for 2006 emphasized

urban development in reference to JNNURM, the massive new national development program.11

Cities and towns are centers of growth and generators of employment opportunities. Our cities need

to have a new look for which they need massive investment and renewal. They need basic amenities

like sanitation, drinking water and proper housing for the poor. They need public transport, parks

and playgrounds. We need cities in which the working poor can live with self-respect and dignity;

cities in which children and women feel safe and secure. In order to ensure that our cities have

better infrastructure and that they have better living conditions, we launched the Jawaharlal Nehru

National Urban Renewal MissionI see a glorious decade of city development ahead of us.

The challenge before Government is to implement these programs. We have to improve the way

governments function and deliver public services. How do we do this? How do we ensure that higher

inancial outlays translate into better outcomes?

In his speech, Prime Minister Singh explicitly links improvements in (1) urban living conditions to

(2) increased urban investment and (3) better management and governance. Each of these links

has been a focus of the FIRE (D) Program since its inception in 1994. Creating healthy and vibrant

citiesand cities that will continue to stimulate the economyrequires an integration of these

three issues. With Rs. 100,000 crore (US$22.2 billion) of investment over 7 years (half of that coming

from the central government), JNNURM is a bold step. JNNURMs multi-pronged approach covers

governance-oriented reforms, pro-citizen (including the poor) engagement, and city-wide project

funding for 63 cities.12 Cities receive funding packages if they commit to pursue key reforms and

create a broad-ranging, participatory development plan (city development plans). The infrastructure

grants encourage cities and states to implement reforms that attempt to link: Development planning Good governance practices

City investment Civil society and pro-businesses policies Basic services for the poor

The new approach to reform-linked funding from the Government of India represents a culmination

of two decades of active debate and experimentation on various reform items in the country,

ranging from measures that support and strengthen decentralization based on the 74th Constitution

Amendment Act (74th CAA) to improving service delivery through a number of commercial modes

and innovative pro-poor pilot projects. Along with government schemes, many local initiatives

from civil society organizations have become worthwhile avenues. JNNURM has provided a unique

platform to bring together dierent approaches and innovations already tested and promoted by

the FIRE (D) Program and others over the years. If implemented fully, these will indeed change the

way in which local governments function by adding transparency, increasing inancial viability, and

improving the lives of urban poor (see the full list of reforms in Annex 1-2).

JNNURM signiies a nationwide scale-up of some of the most successful urban pilots over the last

decade. There is also recognition that the 74th CAA has not been fully implemented almost two

decades later. JNNURM tries to reignite the decentralization process. In reality, it is fairer to say

that the spirit of the amendment has not been implemented because much of the content is not

actually mandatory. Although the amendment recognizes and protects the political autonomy of

municipalities for the irst time, and establishes the parameters for their creation and electoral

representation, it does not change the process for assigning functional responsibility and iscal

powers. Local government elections for creating a city council, among other things, are compulsory

and therefore implemented more or less by the prescribed deadline. However, the degree of functional

11 Independence Day Speech byDr. Manmohan Singh onAugust 15, 2006, http://www.theholidayspot.com/indian_independence_day/speeches_by_prime_minister/address_2006.ht

12 Megacities with populations ofmore than 4 million (7), cities witpopulations between 1 million an4 million (28), and other selectedcities like state capitals and citiesof religious/historic and touristimportance (28).

1.2



and iscal decentralization is still at the discretion of each state, since legislation has to be passed at

the state level. The 74th CAA language specifying that state governments may devolve power to

local governments has been used by many states to defeat the true spirit of decentralization.

If newly established and elected local governments have only limited taxing powers and authority

to set service rates, they can never be autonomous and self-governing. Weak iscal authority

makes it particularly dificult to provide eective city-wide services. Without such functions, local

governments cannot respond to the demands of their citizenry, and their credibility quickly declines.

If local government is fundamentally constrained with weak inances and/or limited mandate, it has

minimal inluence in shaping development, and cannot be seriously held accountable for improvingthe living conditions in the city. Currently, the expectations placed on local government far exceed the

institutional and government realities.

th Dcizio IpivThe spirit of the 74th CAA rightly identiies local government as the best institution for delivering

services to urban residents and encouraging city development. In 1989, Prime Minister Rajiv Gandhi,

who initiated the decentralization process, believed that a centralized government system could not

deliver prosperity for a country as diverse as India over any long term because too many divergent

aspirations and cultures exist to be accommodated by a top-down and inlexible, central system.13

In many ways, state-level institutions and local communities have fundamentally opposing goals.

State governments, by deinition, are most concerned with overall performance of the state. As aresult, state governments prioritize projects and utilize their limited resources based on a much

larger geographic area than what matters to many urban residents. For example, the most important

road networks for a state might be interstate highways. In contrast, local services are the utmost

importance to urban residents: parks and schools in their neighborhood; water, sewer, and electrical

supply to their houses; and job opportunities, transport, and culture throughout their city.

In addition to divergent objectives, the representational distance between citizens and state

governments is too great to deal with everyday issues. A state capital is often physically too far

away for average citizens to engage with regularly. But more importantly, state government oficials

do not have enough time to resolve local issues in every town or city. Only the most prominent

local issues could aect state elections, and those are the ones politicians become involved in.

The small, everyday issues, vital to running a city

eectively, are important to an entirely dierent

group. Prime Minister Rajiv Gandhi articulated

that the wide gap between citizens and central or

state representatives creates a relatively small and

privileged group of high-powered brokers, which

encourages trading money for access.14 This system

discouraged accountability. Prime Minister Gandhi

concluded his 1989 speech to Lok Sabha saying, We

are bringing to an end the Kakaesque nightmare

through which the people at the grassroots

live. Their problems can now be solved at their

doorsteps, answerability will be within the village

and accountability will be nailed to the door.15

Decentralization and greater transparency in urban

management and fund utilization can help tackle

issues of corruption, which is of increasing concern

in the country.

Being able to resolve local issues quickly and

eectively is one of the most practical reasons

why decentralization makes sense. A locally

elected oficial, with real decision-making

power, will care much more about improving the

everyday quality of life of his/her neighbors and

13 Sivaramakrishnan, K.C., 2000,Power to the People? The Politicsand Progress of Decentralisation,Konark Publishers PVT LTD:New Delhi, page 17.

14 As highlighted by the Governmentof India Vohra Report in 1993,corruption became a majorconcern across the countryand helped drive economicliberalization and decentralization.

15 Ibid, page 52.



1.1constituents. This translates well into managing city-wide

services and infrastructure because many of the parameters

for infrastructure are based on the local attributes, such as

environmental conditions, topography, human density, and

the spatial layout of the city. Furthermore, the customers

are all local, and the long-term maintenance of services will

have to stem from local initiatives. This often leads to more

sustained interest in an initiative. The surprisingly fast success

of introducing door-to-door garbage collection in Durgapur

and Asansol, West Bengal, highlights the beneit of localservices. Without door-to-door collection many people pitch

their trash in the street, creating an environmental hazard. It

was never clear who or when the trash would be cleared. But,

with local government encouragement, communities began

forming microenterprises to take on this work, a direct link

formed between the household beneiciary and the new service

provider, who could be monitored closely by each household.

A pilot for Durgapur and Asansol quickly expanded to 50%

coverage in less than 1 year, with easily veriiable results:

Streets were cleaned, with households paying Rs. 15 per month

to the sweepers.

Although most people agree with the logic that advocates

local service delivery, various technical, inancial, and political

concerns help retain authority within state governments,

which often represents the status quo. Low capacity of local

governments is a real concern, but it will remain a problem until

the institutional structures change to encourage improvements

internally. There is little internal incentive for local governments to reform so long as inances low

generously from the center and state governments, service responsibility remains outside local

governments, and electoral accountability does not have a strong connection to urban management

(few cities have mayors with executive powers).

One of the fundamental administrative dificulties in many cities is that municipal commissioners,

who still retain most management power, are neither locally elected nor accountable to mayors.Municipal commissioners, irst and foremost, report to state or national cadres.16 Second, they can

be transferred at a moments notice. And, despite the long-term nature of implementing urban

projects, their tenure is relatively short, usually between 6 months and 3 years. The well-known case

in Lucknow demonstrates this challenge: The city had eight commissioners in 2 years. The lack of

continuity and absence of local accountability of city management is very disruptive to implementing

urban reforms and projects.

th Ipoc o loc, good govco IscMost international institutions deine good city governance using similar jargon about citizen

participation, accountability, transparency, responsiveness, eective rule of law, consensus-driven,

and equity in services across the city.17 Much of this makes intuitive sense, because city managersneed the authority and structures to deliver services, while also gaining the trust of local businesses

and civil society to which those services will be delivered. A city has to continually demonstrate that

it is a creditworthy partner for investors and lenders of all type. Making a city work is especially

about ensuring that both todays and tomorrows needs are met. Still, listing these governance

principles does not provide a practical framework to build on. A central question is how the

governance principles translate to making a city thrive over the long term?

16 Kapoor, R.M., 2002, Policy Optionsfor Framing New MunicipalLaws in India: Volume 1 Part onGovernance of Muncipalities,FIRE (D) Program: New Delhi, India

17 The international institutions withsimilar deinitions include the

World Bank, the United Nations,the Asian Development Bank,AusAID, and the Organizationfor Economic Cooperation andDevelopment. See An Explorationof Sustainability in the Provisionof Urban Services in Indian Cities,2008, The Energy and ResourcesInstitute (TERI), with SustainableUrbanism International andArghyam: New Delhi.

1.2



Do ciy ipovs o ovc?The availability and quality of city-level data is poor in India. But for the first time, a number of recent studies of Indian

cities are beginning to allow useful data comparisons. The diversity of geographic areas, urban agglomerations, and

municipal performance provides a great opportunity to test the changing landscape. An urban indicator system is critical

for monitoring reform progress and prioritizing interventions. At this time, there is not enough information for creditable

conclusions, despite apparent trends (with moderate statistical correlation).

These graphs compare governance, infrastructure, and urban financial per formance.Three studies have examined relevant factors: NeoIT used the Offshore City

Competitiveness Index in 2004; more recently Ernest & Young with the Federation of

Indian Chambers of Commerce (FICC) looked at factors affecting real estate investment

decisions in 2007; and the Institute for Competiveness designed an Indian-specific index

for liveable cities in 2010.18 Furthermore, the Ministry of Urban Development (MoUD)

commissioned the credit rating agencies (Fitch, CRISIL, ICRA, CARE) to rate 59 of the

JNNURM cities. Some simple comparisons show interesting trends (higher index values

signify better performance).

The governance index is based

on both the reforms that local

governments have been undertaking

and their budget outlays, as

analyzed by Ernst & Young in 2007. The infrastructure data set isalso from the 2007 study and compiles indicators on water, roads,

rail, airports, IT/telecommications, social infrastructure, and

proposed construction. The 2010 Liveability Index looks at a wide

set of quality of life factors influencing peoples decisions to live in a

particular city, but does not directly look at governance or municipal

budgets (and is therefore a good point of comparison).

Recent studies of Indian cities suggest that governance, as well as inancial management more

speciically (including credit ratings), does aect infrastructure development and urban quality of

life. The FIRE (D) Program encourages good governance in the areas most relevant to infrastructuredevelopment: (1) promoting institutional structures that provide incentives for management

eficiency and investment; (2) creating a policy frameworkthat furthers decentralization and

empowers local government suficiently; and (3) equipping local governments/utilities

with necessary tools for successful urban management in modern India (e.g., accounting

reforms, e-governance).

Good governance policy pays a lot of attention to the creation of regulatory structures and

transparent rules and procedures that encourage competition and the ability of private actors

to invest eficiently. Traditionally viewed as a natural monopoly and government sector service,

telecommunication liberalization and deregulation throughout the 1990s, at the time of expanding

mobile phone technology, is a great example. Households could stop pleading with their government

18 Confederation of IndianIndustry (CII)/Institute forCompetitiveness, n.d., LiveabilityIndex 2010: The BestCities in India, http://www.competitiveness.in/wp-content/uploads/2010/03/Liveability-Report.pdf; andErnst & Young, 2007, IndianReal Estate: Growth andNew Destinations.

0 0.5 1 1.5

Governance Index

Governance to Liveability

Liveability

Index

2 2.5 3 3.5

45

40

35

30

25

20

15

10

5

0

0 0.5 1 1.5

Governance Index

Governance to Infrastructure

Infrastructure

In

dex

2 2.5 3 3.5

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

4 6 8 10

Credit Rating to Infrastructure

Credit Rating Index

Infrastructure

Inde

x

12 14 16

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

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Credit Rating Key

Non-investmentGrade

InvestmentGrade

D

C

B-

B

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

AA

AA+

AAA

1

2

3

4

5

6

7

8

17

18

9

10

11

12

13

14

15

16



1.1phone company for a landline connection; instead, private irms recognized market demand, invested

heavily in the sector, and simpliied connection procedures. Telephone connections increased from

5.07 million in 1991 to 671.69 million in 2010, making India the fastest growing market in the world.

A problem with the traditional, centralized development model is suboptimal investment from

government into services. A mere 20% of annual, new urban investment requirements can be

funded by revenue surpluses and external support (intergovernmental transfers and foreign aid),

including JNNURM expenditures. The local system of governance has to change to encourage

private investment.

In addition to setting simple and incentive-based rules, government can encourage private

investment by accommodating a wide range of choices in how the private sector spends its money

and accesses services. Choices allow people to act in their own best and most desirable interests;

it encourages eficient delivery of services because people often choose the superior and best

valued product. Even in natural monopolies like water or sewerage, people have choices: Many

drill individual bore wells that are often illegal and deplete the water table, others might purchase

expensive tanker and bottled water, and many people are forced to defecate in the open because the

community lacks sanitation facilities. These are not necessarily great alternatives, but people choose

them because the government system for delivering services is so convoluted and complicated that

they encourage noncompliance.19 A high percentage of informal settlements result in this manner.

For example, in Ahmedabad, SEWA microinance institution recently assisted slum dwellers, who

already had Right of Resident documents, to access full property titles so that they could collateralize

and leverage them for self-investment in home improvements, service connections, etc. The processentailed more than 15 discrete steps, across the city, in various ofices, over many months. Without

nongovernmental organization (NGO) assistance, it would have been nearly impossible; even with

SEWAs help, the task was unfeasibly dificult.20 Complex government rules act as a disincentive for

legal, private investment. Real estate development in India shows how convoluted rules (e.g., strict

master plans, high stamp duties, complicated registration process, and near monopoly power of

development authorities) discourage legal investment.21 Now, in parts of Delhi, up to 70% of the real

estate costs are part of informal, black money transactions.

It is easier to create an enabling environment to incentivize positive growth and investment if one

institution has authority over urban planning, inancing and budgeting, and service delivery.22 With

all these functions under the jurisdiction of one institution (e.g., the local government), a single set

of rules can emerge to govern the whole development process. In contrast, multiple institutions

with overlapping authority (local, state, central, and autonomous) tend to create their own rules

that become fragmented and potentially contradictory. In Kolkata, for example, the Metropolitan

Development Authority, the Kolkata Municipal Corporation, and the Irrigation Department of

the Government of West Bengal (each operating under dierent legal provisions) all had roles in

drainage functions of the city, making eective day-to-day coordination very dificult.

Furthermore, if the same institution has both inancial and functional authority across the entire

metropolitan area, it can better inluence the development path of the city. This is all the more

relevant when that institution has responsibility over all the key physical infrastructure sectors

contributing to land development (e.g., water, sewer, electrical, solid waste, and roads/transport).

These infrastructure services, in addition to authority over planning approvals and building

bylaws, constitute the built environment of a community. With adequate authority over the built

environment, a local government can guide the look, feel, and liveability of its area. In contrast, as ismore often the case, a fragmented governance structure translates into growth trends that do not

correspond well with service provision.

There are roles for varying levels of government in service delivery, but the jurisdiction and

responsibility of services has to be clear, ensuring that there are no overlaps in responsibility and

that the institution in charge has adequate iscal powers. Professional skills within an institution also

have to match those required to manage the services. In Bhubaneswar, the capitol of Orissa, the citys

new growth pattern is to the northeastern corridor toward Cuttack, where no water system and few

paved roads currently exist. Although the commissioner is aware and interested in this, his team

does not manage planning or water investment. Those powers reside in the parastatal Bhubaneswar

Development Authority and other state-level agencies. The eectiveness of delivering municipal

19 The idea of rules and choicesstems from the economist PaulRomers case for Chartered Cities

20 Presentation to internationalworkshop, January 29-30,2010, Scaling up Upgradingand Aordable Housing: FromNational Policies, to StatePrograms, and Citywide Slum-Fre

Interventions, Udaipur, India:World Bank.

21 Billand, Charles, 1990, DelhiCase Study: Formal ServicedLand Development, USAID,New Delhi, India.

22 Responsibility for a function doesnot automatically mean that theinstitution undertakes it itself.The recent dialogues aboutresponsibility platformssuggest that the function canbe outsourced so long as aperformance mechanism is inplace, like a contract or funding.See the Chapter 4 article onwater sector reform in Orissa asan example.

1.2



services ultimately aects economic development because businesses need buildings and services

for their operations, and they need access to markets. For these reasons, the World Bank argues that

responsibility for the built environment is much more important to remain at the city level than are

other critical services like healthcare, education, and welfare.23

At the same time, it can be argued that primary healthcare and education should be a locally

provided service. The best way to determine whether the local, state, or central government should

be responsible for a particular service is where, geographically, the infrastructure is based (with

respect to both inputs supplied and services delivered). If the urban challenges and solutions are

locally based, then the local government should be responsible. If, however, trans-jurisdictionalissues exist, such as watershed management or metropolitan rail systems, then a regional/state

authority would likely play a role (e.g., metropolitan/district planning commissions or sector-wide

regulation). Trans-jurisdictional issues are always complex for ensuring clear accountability across

institutions. Service unbundling has worked very well with some types of sectors, like energy. The

institution that produces the power does not need to be the one that delivers it to households.

Unbundling also opens avenues for private sector participation in speciic aspects of service delivery

(e.g., electricity generation), but not necessarily privatization of the whole sector.

good govc fwok bsd o accoiiyMany aspects of good governance aect sustainable and inclusive infrastructure development. The

FIRE (D) Program focused on one of them: urban management reform. At the same time, a good

governance framework can promote democracy as well as improve the quality of local services.Accountability, as deined as being held responsible for decisions, administrative actions, and

policies, is probably the most relevant governance theme. Real accountability helps direct, restrain,

and motivate the public sector to deliver services. It becomes a real force when combined with other

good governance principles like transparency and citizen participation to create eective institutions

of self-government as envisaged by the 74th CAA.

The 74th CAA makes a revolutionary change by recognizing local governments right to exist

through the following mandatory provisions: (1) constitution of municipalities, (2) composition

of municipalities, (3) holding of regular elections, under the supervision of the state election

commissions, (4) protection against arbitrary dissolution of local elected bodies by higher levels of

government, (5) constitution and composition of ward committees to ensure greater proximity to

citizens, and (6) reservation of seats for women and other marginalized groups.24

The second main component of the 74th CAA calls for state legislatures to devolve whatever

responsibilities they deem necessary to empower local governments for planning economic

development and social justice, and for implementing development schemes required of them, as

institutions of self-government. To facilitate this empowerment, the 74th CAA recommends devolving

18 key functional responsibilities, listed in the 12th schedule of the Constitution. Considering the

size of the country and the diverse conditions of local governments, the devolution process was left

to the states to decide. Unfortunately, most states have not approached this very objectively. Finally,

the 74th CAA mandates two elements of regulatory oversight for municipalities: the formation of

state inance commissions (SFCs), in line with the Central Finance Commission, to identify avenues

for municipal inance and criteria for transferring resources from states to local bodies; and the

formation of District Planning Committees and Metropolitan Planning Committees (led by elected

oficials) to consolidate multijurisdictional development plans. All together, these provisionsencourage functional and inancial autonomy, within a more democratic government structure, and

try to make local governments directly accountable to citizens.

Civil society participation as a pillar of accountable governance. In relationship to accountability,

decentralization of authority means government is answerable to the people through elections and

other forms of participation. At the local level, the city government should be answerable to the

desires, priorities, and well-being of its residents. Those priorities are usually improved services,

economic opportunities, and safety. It comes as no surprise that water, sanitation, and health

typically rank very high on urban residents concerns. In addition to electing city oficials,25 there are

other important avenues to encourage government accountability. As a prerequisite, thepublic needs

to be informedif they are expected to meaningfully participate in governance. Awareness campaigns

23 Hunter, Roland and Ryneveld,Philip van, 2009, FinancialManagement of City Services:Enhancing Creditworthiness andOrganizational Eectiveness inIndian Cities, World Bank.

24 This refers to historicallydiscriminated castes in India,including scheduled castes,scheduled tribes, andbackward classes.

25 Elections for executivesarguably only happen directlyin mayor-in-council types oflocal government, which existsin the states of West Bengal andMadhya Pradesh.



1.1as well as transparency and disclosure laws help create a better informed public. In this regard, how

a city operates inancially is one of the most relevant pieces of information, and that process needs to

be transparent, made public, and monitored by the taxpayers.

Residents will always want toparticipate on issues directly affecting their everyday lives, and can do so

easily through citizen report cards, neighborhood-/ward-level meetings, or a variety of other ways.

Through direct citizen participation, the decentralization process can extend to the sub-city level,

to neighborhoods across the city. Formal interaction at the neighborhood or ward level connects

city oficials directly to communities that can express local priorities, concerns, and aspirations, as

has been successfully demonstrated with Delhis Bhagidari system. Starting in 2000, the municipalcorporation, with implementation support of local NGOs, deined sub-ward neighborhoods

throughout the city where communities could gather to raise concerns and tackle problems as a

group, even receiving small budgets to implement their suggested changes. The FIRE (D) Program

found how critical local participation was while planning for slum upgrading and creating local area

development plans.

Improving internal operations as a pillar of accountable governance. It seems inappropriate

to discuss local government accountability if the city is not empowered with iscal and functional

authority over particular services. If the city is not responsible for paying for and delivering services,

then, by deinition, it is not accountable. Clarity of the roles and responsibilities of all the institutions

in the city helps dictate just how accountable local government is in service provision. It is very

confusing and ineficient when multiple institutions work in the same functional space.

uc ahoiy Dys Svic CociosConnecting slum households with legal water and sewer services in Bhubaneswar proved challenging for the

FIRE (D) Program for several reasons. The municipal corporation seemingly had to approve and then verify

infrastructure works although it had no practical role in the service delivery. Municipal officials themselves

became unsure of their role when they started processing a no objection certificate (NOC). At first, the NOC acted

as verification that low-income households all had rights of residence. But then it was discovered that municipal

engineers had to inspect road cuttings. With the water utility repairing all the roads, the city engineers did not know

how to treat a zero damage assessment. In the end, this delayed a seemingly simple procedure by more than

3 months. Government roles and responsibilities need to be clear to everyone.

Another key principle in creating accountable local governments is matchingfunctional and iscal

authority with capacity improvements. There is little beneit of transferring responsibilities for

services to local governments if they are too weak to eectively fulill those responsibilities. This has

been endemic in many cities in which the FIRE (D) Program works. City managers require signiicant

training, institutional support, and continuity of sta. In modern India, city management relies on

technical and professional skills, like accounting, IT, and engineering, that many cities currently

lack. One technology partner oered to compile all the property tax information of a city onto a

single geographic information system (GIS) mapping platform for a systematic approach to tackling

noncompliant property owners. Although this service was oered on a success-fee basis (without

any budget outlays), the conversation stopped short because the city oficial did not understand

the concept and seemed unsure what questions to ask to gain more information. Maintaining local

governments current status quo will have increasingly negative eects on internal operations,

as outside urban dynamics continue to change rapidly (technology, economics, migration, etc.).Better human resource policies will need to help change the incentives to hire, train, and retain

more qualiied employees. In Jabalpur, Madhya Pradesh, for example, the local government started

assessing employee performance each month against a work plan, and having discussions about

how tasks can improve incrementally. This information could be tracked over time, and performance

could even be tied to bonuses or other incentives.

Clarity of the rolesand responsibilities ofall the institutions inthe city helps dictate

just how accountablelocal government is inservice provision

1.2



Improvements in capacity and performance also stem from accurate information lowing to the

right decision makers, in a timely fashion. To build capacity in this respect, local government could

borrow advancements in business processing from private sector companies that use integrated

information management systems and data low to inform decision making.26 Financial management

reform and e-governance are two key parts of this broader business process. Again, it is dificult

to hold individuals or government accountable if they lack accurate, real-time information. In the

absence of accurate information, decisions, no matter how well intentioned, may get made without a

true picture of the conditions. Luckily, recent technological advancements have made implementing

these systems much easier. However, government oficials run the risk of treating technology as a

panacea; new technologies themselves will not provide much advantage if they are not accompaniedby thorough hands-on training.

Regulatory oversight as a pillar of accountable governance. A inal pillar to explain how

accountability is a unifying theme of good governance is oversight. While civil society can help ensure

elected oficials are accountable through participatory structures, there are many technical areas

aecting urban services in which the public cannot usually engage. For example, residents might be

concerned with water quality and demand improvements, but most people will not understand the

speciic contaminants or bacteria cycles that pollute water. A third party with technical competence

should monitor water quality and other infrastructure speciications. A good regulatory framework

ensures safety and sustainability of services, while at the same time encouraging optimal utilization.

Regulatory oversight must include: Clear, unambiguous, and transparent rules that promote safety, sustainability, and development Quantiiable benchmarks and standards that are widely agreed upon Speciic indicators that can be monitored, audited, and evaluated objectively Enforcement mechanisms with real consequences for violators

This third-party oversight has the same relevance in iscal issues, such as debt management,

intergovernmental transfers, or tari setting for services. In this way, regulation holds government

oficials to certain standards that are considered fair by society. It is possible to design appropriate

and transparent regulatory institutions at either the state or central level, or as autonomous

organizations. What is important is that regulation is based on fair, clear, and agreed upon standards

that are enforceable. If louting regulations does not lead to inancial penalties, court rulings, or

voluntary change in behavior, then oversight is meaningless. The violator who acts above the law is

no longer accountable.

The interplay among (1) civil society participation, (2) internal government operations, and

(3) oversight provides a strong framework for accountability and good governance (see summary

table below). The framework highlights the most relevant aspects of good governance with regard

to infrastructure development and urban management. The FIRE (D) Program supports all three of

these pillars in varying degrees, focused on internal operations of local governments and utilities.

In its early stages, the FIRE (D) Program realized that a focus on project development and inancing

would have to go hand-in-hand with changes in policies, improved urban governance, and sta

capacity building. Thus, the FIRE (D) model holds both inancial sustainability of infrastructure

projects and improved local governance at its core. Keys to the models success, explained throughout

this guidebook, are the ability of municipalities to generate suficient revenues to cover not only their

operations and maintenance costs, but also future investment in infrastructure needed to service the

fast-growing population.

This article provides a good governance framework to orient urban initiatives appropriately,

whether drafting a MML (see Article 1.3 below), improving creditworthiness of cities, or designing

e-governance (see Chapter 4, City Financial Viability). This governance framework helps provide the

overall orientation to the process for developing infrastructure.

26 Known as enterpriseresource planning(ERP) systems.



1.1

27 These examples are drawn fromFIRE (D) work and TERI, 2009,

An Exploration of Sustainabilityin the Provision of Basic Servicesin Indian Cities, New Delhi: TERIPress. See Chapter 6.

InternalOpe

rations

Civil

Society

Oversight

Pillar of accountability

in democracy

Empowerment/ executive

mandate over the built

environment of the entire city

space (functional and fiscal) Internal business processes,

capacity, and improveddecision making, including

administrative reforms Information and data

management (management

information system [MIS])

Transparency, disclosure, and

citizen education Structures to encourage

participation in governance

(e.g., further decentralizing to

wards/neighborhoods, planning

and prioritizing programs) Electing an executive and

council directly

Sector regulations (quality and

fiscal standards, monitoring

and evaluating performance) Enforcement of rules, i.e., rule

of law

Key strategies applied by the

FIRE (D) Program

Improved creditworthiness of

cities through improved resource

mobilization, financial management,

and accounting reforms Institutionalization of best practices

through the training network andcity managers associations to build

implementation capacity and

achieve impacts

Incorporating pro-poor orientation in

project planning Establishing and fostering

partnerships with national

government and private

organizations Constant information sharing and

feedback from partners, including

local, state, and central governments Household surveys/willingness-to-

pay studies

Encouraging municipalities to

structure performance-based

contracts for operation and

maintenance of urban services Regulatory oversight

for infrastructure

Examples of local government initiatives27

63 cities received credit ratings under JNNURM by the

Government of India Sub-city decentralization in Surat, including providing simple

fiscal and functional authorities to zonal of ficers, opening

16 civic centers with single-point services, and an effective

grievance system Human resource changes in Ludhiana that utilize monthly

performance appraisal of staff Organizational restructuring in Indore, Bangalore, Bhubaneswar,

and Asansol to improve ef ficiencies in establishment costs Improved mobilization of internal resources by Indore, Nagpur,

Bhubaneswar, Asansol, and Durgapur

E-governance initiatives that increase information availability

to the public: Hyderabad and Secundrabad have 43 e-seva

centers, serving 35,000 people a day Citizens charter in Guntur to publicize the expectations of local

government and citizens alike that increases awareness and sets

a standard for accountability Bhagidari or community partnership in Delhi, where citizens

contribute to prioritizing issues in their areas, receiving small

budgets for improvements Citizen report cards in Bangalore, Nagpur, and elsewhere to rate

services and communicate priority areas for improvement

Performance contracts in Navi Mumbai water and sewer sectors

for incentive-driven regulation of private service providers State Finance Commission in Tamil Nadu provides excellent

oversight of municipal fiscal framework

The FIRE (D) Program has learned that prior to assisting cities in improving revenue generation,

municipalities should irst have transparent accounting practices so citizens can trust that their taxes

and user charges are not being mismanaged or misappropriated. Next, citizens must be charged

reasonably for services such as water, charges that are aordable, adequate to cover costs, and

based on a willingness to pay. With better communications, transparency in government operations,

and real improvements in service delivery, most people are willing to pay more reasonable and

sustainable user fees.

t1-2. gd gvc fwk Cd acciiy

Fire(d)program

1.2



jnnurm d good govc

Many of the JNNURM reforms it into the above-mentioned framework, while others relate to speciic

activities in the city, such as liberalizing land markets,28 improving access of the poor,29 and enabling

rain water harvesting in building bylaws.

From the perspective of improving local governance, the reforms could be designed/sequenced to

address the most signiicant gaps at the local level. See Annex 1-3 for a list of the JNNURM reforms

and how they are grouped into the good governance framework.

The JNNURM reform measures have stimulated a tremendous dialogue among stakeholders

concerning implementation and linkages to improved service delivery. However, the Planning

Commissions mid-term appraisal of JNNURM pointed out varying degrees of reform performance

across participating states and cities.30 Many states were willing but lacked suficient capacity at the

state and local government level to develop, plan, and execute reforms and projects. The experience

from the FIRE (D) Program shows that infrastructure and service delivery projects have a long

gestation period, especially if they involve acceptance of new ideas and major policy and institutional

reforms. Successful execution of pilot projects helps gain local buy-in and consensus. This is essential

for broader acceptance and lasting change. For example, the FIRE (D) Program designed and

successfully tested a resource mobilization methodology with the Indore Municipal Corporation

before publicizing it nationally. With time, it gained broad acceptance and is now incorporated by

the Government of India as part of the national JNNURM initiative. The 13th Finance Commission

has also recognized the important role of municipal accounting reforms and municipal bonds in

improving the inancial situations of local governments.

A major reason for slow progress is that the reforms most closely related with good governance are

predicated on state government actions through legislation. Apart from improving tax collection eorts

by local governments, all the reforms require states to change the municipal acts and/or individual

regulations before local initiatives can begin. For example, cities are still dependent on the state

government to change their property tax rates and assessment methodology to one that is area-based.

In practice, it is dificult and time-consuming to implement many of the reforms. Most local

governments operate in a ire-ighting, reactionary mode. Further, they do not have internal

capacity and need dedicated commitment from government oficials at the city and state levels, as

well as substantial technical support. In Orissa, the FIRE (D) Program heavily supports the states

govc d Poicy Iiiivso h fIre (D) Po

Some of the key legislation and policy changes that the FIRE (D) Program was instrumental in supporting include: The MML, which provides guidance for Indian states to fully implement the mandatory 74th CAA, empowering local

bodies through decentralization Contributing to the design of multiple reforms included in the JNNURM to encourage decentralization and better

urban management Pro-poor policies and strategies that ensure the urban poor have universal and af fordable coverage of water and

sanitation service through private house connections and individual toilets National Municipal Accounting Manual, which promotes better financial management and governance through

double entry, accrual accounting to introduce transparency and accountability into municipal finances Municipal Credit Rating methodology to assess the financial strength and borrowing capacity of cities Tax-Free Municipal Bond Guidelines, which encourage investment in urban infrastructure through capital markets

and interest rate write-downs Policies on structuring bankable urban infrastructure projects to help make them attractive to private

sector investment E-governance policy to provide a design for the re-engineering and automation of key municipal services Pooled Finance Development Fund guidelines and toolkit to help enable smaller and medium-sized municipalities

raise funds from the market to fund urban infrastructure needs

28 Repealing the Urban Land Ceilingand Regulation Act, reform rentcontrol laws, and rationalizationof stamp duties.

29 Internal earmarking for the poor,basic service provision, andearmarking 20-25% of land forEWS & LIG income categories.

30 Sen, Amiti, JNNURM Phase-II toTarget States Stepping Up UrbanReforms, Economic Times,19 April 2010.



1.1

comprehensive water sector reformfrom initial conceptualization of the new system to legislative

reforms and now to detailed changes in institutions and operations. All said, implementing this

reform will likely be a 5-year continual process (see Article 4.4). This close day-to-day, trust-building

partnership and working relationship helps pave the way for institutionalizing good governance and

inancial management reforms that become the foundation for better management and performance.

It is almost impossible to evaluate the progress of JNNURM reforms because program auditing is still

in its early stages. A benchmarking and indicator system is just now being tested,31 but it would need

to become a regular occurrence to provide long-term evaluation. States need to move beyond check

boxes to build a robust monitoring system into JNNURM. Occasional site visits provide a qualitative

view for central government, but without a systematic approach this is only anecdotal.

JNNURM has certainly elevated the importance of Indian cities in the national consciousness

and provided impetus, if not consensus, on urban governance reform. Undoubtedly, it will take

signiicant eort and many years to accomplish the decentralization vision. The FIRE (D) Program

conceptualizes the long-term outlook as a pyramid with the right policies and enabling environment

as the foundation. Other aspects, like strengthening internal capacity, build on the legislative

framework. This in turn sets the conditions for attracting infrastructure investments and improving

the living conditions of the city, including the poor. A strong legislative foundation for decentralization

helps propel subsequent reform eorts. In this respect, the MoUD requested that the FIRE (D)

Program investigate policy options for strengthening municipalities. In 2003, this eort culminated in

the MML to act as a guide for states to review their own municipal acts (see Article 1.3 below).

31 Basic information on servicedelivery and deriving performancassessment is not yet common inIndian local governments. MoUDcommissioned credit ratings for57 cities, and WSP is assistingin establishing water sectorbenchmarking. The Government

of India has begun StandardizedService Level Benchmarks on apilot basis in a few cities acrossthe country; its state-widereplication in two statesGujaratand Maharashtrathrough thePerformance Assessment System(PAS) project of CEPT Universitywill provide a useful informationbase to monitor service level andquality. A state-wide PAS is beingdeveloped for all cities in Gujaratand Maharashtra with supportfrom the CEPT University througha 5-year action research project.See http://spcept.ac.in/pas_project.aspx?pg=pas&sub=pas.

Fire(d)program

1.2



ARTICLE 1.3

t md micip lw

The MML is a tool for transforming cities into institutions of self-government. It sets the structure,

functional areas, iscal powers, and oversight that would be necessary for establishing viable and

more autonomous local self-governments. In so doing, the MML helps cities and states implement,

in totality, the provisions of the 74th CAA, as well as other decentralization objectives of JNNURM

and recent Government of India policy statements. The legislative objective is to devolve urbanmanagement authority from state to local governments in a manner that encourages good

governance, as framed in the previous article of this chapter.

That objective essentially means that local governments will be accountable to urban residents

for providing better services, while balancing iscal and functional imperatives. Without needing

to seek permission from state governments on every issue, local governments will have the

prerogative to generate revenues, program spending on capital projects or maintenance, and plan

for new projects as appropriate. Citizen participation in ward committees, by electing a council with

executive powers, among other avenues of involvement, will demand better services from their

local governments, and this will build accountability over time. Local government will also have the

power to build internal capacity as required for delivering better services.

State government agencies will also change from managing day-to-day aspects of cities to providingoversight, regulation, and advancement of strategic policies. This represents a signiicant shift that

is necessary to ensure that the underlying governance principles of participation, decentralization,

autonomy, and accountability of representative urban local governments are kept in view.

The conformity legislation passed by all state governments, as part of the 74th CAA ratiication

in 1992, compelled states to create local, democratic governments by holding elections

and constituting state inance commissions. The less straightforward aspects of functional

decentralization, however, were not mandatory, and have since proved very dificult to accomplish.

It is well known that the old municipal laws cover a very wide canvas. Unlike many other laws, the

municipal laws in India are greatly inluenced by state-wide politico-socio-economic and cultural

environments, as well as local perceptions and traditions. These laws are often voluminous and may

run into 500 sections or more. Many were drafted more than a century ago and have undergone very

little modernization. Instead of trying to update them piecemeal, the MoUD felt it would be more

helpful and eficient to provide a comprehensive guide that appreciates the interconnectedness of

issues relating to managing modern cities.

The FIRE (D) Program, with the National Institute of Urban Aairs (NIUA) and the Times Research

Foundation, supported MoUD to create the MML as a user-friendly resource for state governments

to evaluate and then use as the basis for redrafting their

own municipal acts. Most states have initiated the redrafting

process, although few have taken the comprehensive approach

that the MML encourages. The State of Kerala, for example,

has changed its municipal act to decentralize functional and

iscal powers in such a way that only a new/revised act cansupersede. Other state-level laws, policies, and rules cannot

infringe on the new powers of local governments. In contrast,

many states decentralized functions, piecemeal, through rule or

policy changes that can be altered again at any time by the state

government, which technically means that local governments

remain in the legislative domain of the state.

The MML oers an alternative to the somewhat irregular

approach to decentralization that many states have pursued.

The FIRE (D) Programs team worked for 2 years (20012003)

to provide careful analysis and build legislative consensus.



1.11. Policy issues, options, and legislative intentions. It was necessary to assess current municipal

acts across India to understand the existing and diverse municipal structures. The team reviewed

acts of West Bengal, Maharashtra, Tamil Nadu, Punjab, Karnataka, and Madhya Pradesh, among

others. The assessment evaluated how states deal with the main aspects of municipal structure

and management, categorized into four groups: (a) constitution and government, (b) municipal

inance and inancial management, (c) supply of urban infrastructure, and (d) regulation of,

among other things, community health, environmental management, and development planning.

The paper examines the existing policy context of these issues and how they can be reoriented to

pursue decentralized good governance.

2. Policy options for framing new municipal laws in India. The team presented the main indingsof the assessment paper as the primary legislative topics that state governments would have to

consider and act on. To assist state governments in this task, several policy options accompanied

each key issue. The policy options were based on good experiences from many states in India,

as well as on lessons learned from working in the sector. For each issue, the preferred option is

highlighted by a technical review team led by MoUD.32

3. Model Municipal Law. Grouped together, the preferred policy options provide the content for the

MML. To help state governments form new legislation, the team drafted a complete law in

October 2003.

The objective of this exercise was to create a resource from which states could tailor their own

municipal acts to empower local governments. The following are salient features of the MML.

Constitution and Government The MML oers a uniied law suitable for all the three types of local governments,33 while also

recognizing that small towns and villagepanchayats might require a dierent governance

structure and potentially be exempted from a municipal act. Executive powers are vested in an elected mayor-in-council. The empowered council would be

elected directly by municipal residents and the mayor would be elected indirectly through

the council. Ward committees promote decentralization at the neighborhood level and better ensure proactive

community participation. Functional responsibilities for services vary depending on managerial, technical, and inancial

capacities across dierent types of municipalities. Functions can classiied as: (a) core functions

that municipalities are irst and foremost responsible for delivering (including water supply,

drainage and sewerage, and solid waste management); (b) additional functionsassigned by the

state government, which would be undertaken subject to the inancial and technical capacity of

the concerned level of government (e.g., health and education); and (c) other functions of mutual

agreement by state or central government and local government. Dissolution of an elected body in case of corruption and abuse of power occurs through a due

process and review by a state committee. In such cases, a new election is to be conducted within

6 months of dissolution. The MML also has provisions for recalling municipal councilors.

Financial Management of Municipalities A modern system of accounting is based on the national municipal accounting manual. Local

governments are required to prepare an inventory of and then value all immovable municipal

properties/ixed assets.

Financial statements containing an income and expenditure statement, receipts and paymentaccount, and a balance sheet for assets and liabilities must be prepared and published.

Receipts and expenditures must be maintained under separate accounting heads/funds for

water, drainage and sewerage, solid waste management, road development and maintenance, and

general account. These separate funds will be relected in the annual budget. A municipal accounts committee34 facilitates transparency and accountability. Internal auditors will be professional chartered accountants appointed by a state government panel. A debt limitation policy replaces the normal requirement for state government approval for

borrowing. The debt limitation policy would lay down the general principles for borrowing based

on a local governments inancial capacity. Provision for credit ratings and bonds issuances allows local governments access capital

markets and inancial institutions.

32 The review and consensusprocess was captured in a papertitled Specimen Municipal Lawfor Municipalities in India,June 2002.

33 Municipal areas have beenclassiied on the basis ofpopulation into three categories:(1) larger urban areas having apopulation of more than 3 lakhs;(2) smaller urban areasClassA: municipal areas having apopulation of more than 1.5lakhs but not exceeding 3 lakhs,Class B: municipal areas having apopulation of more than 75,000but not exceeding 1.5 lakhs, andClass C: municipal areas having apopulation of more than 25,000but not exceeding 75,000; and(3) transitional areas having apopulation not exceeding 25,000.State governments h

urban and goverance

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